Markets often experience long, smooth upward pushes punctuated by violent pullbacks, brought about by some fundamental event. This isn’t surprising, especially when we delve deeper into market dynamics.
Market studies have shown that the seriousness of market metamorphosis could be decided by the buying and selling pressure. During a serious price movement, pressure gains momentum. Intensifying moves in an equilibrium territory may portend an exponential rise in price pressure. Moves that become less intensified may forecast a counter-trend rise in pressure.
Expanding pressure brings with it a more colossal directional move, but you should not overlook the seemingly refractory nature of the financial markets. The most crucial issue is that it is not just the pressure itself. With any given market move, don’t assume there is a bear for every bull; therefore, market pressure is ineffectual. If this were true, the markets would be caught in never-ending consolidation. Fear and greed of bulls and bears propels the markets.
Transaction pressure and market movements reveal price dynamics. Consider buying/selling pressure as a lopsided attempt, while the market action is the aftermath. If bears are inclined to close orders at all costs, there might be a propensity to do so at the bid rather than the offer. If purchasing need is scantily situated beneath the price, then the markets would be propelled toward the downside until bears get satisfied. Alternatively, if bulls are inclined to act, they may purchase the offer and not sit on the bid. If there is not much resistance, the market may move higher until the bulls are satisfied.
We can capture the tendency of the market to swing from one short-term extreme to the other with a technical-based trading strategy that brings with it the added benefit of simplicity.
The 48-hour movement system uses a simple moving average (SMA) and the relative strength index (RSI), both on a 20-period basis. It is most effective trading currency pairs and crossrates (for example, EUR/JPY, AUD/JPY, EUR/USD, AUD/USD, EUR/NZD, EUR/CAD, GBP/USD, GBP,CHF). It trades on hourly charts. The rules are simple: Go long when the price is above the SMA and the RSI is above 60. Go short when price is below the SMA and the RSI is below 40.
The trade triggers are just part of the plan, however. Just as important are position sizing and risk-control guidelines. Maintain a stop loss 90 pips from the entry price. Take profits 180 pips from the entry price. Move the stop loss to breakeven once prices moves 50 pips in your favor. As for size, smaller positions are auspicious. Trade $2,000 lots.
Finally, if the stop loss or the profit target aren’t hit within 48 hourly bars, exit the position.
In the charts showing the trade examples, the vertical red line on the right shows where a position was opened. The vertical red line on the left shows where it was exited.
On June 8, the major trend on the EUR/NZD was bearish (see “Swinging low,” below). The entry criteria were met, and a short position was opened. There were minor pullbacks and a gap during the course of this trade (which could test our emotions), but sticking to our exit rules paid off. We entered the trade at 1.6280, with a stop loss at 1.6370 and a profit target at 1.610. On June 12, our profit target was hit for 180 pips of profit.
On March 13, a bullish signal was generated in the GBP/CHF (see “Swiss opportunity,” below). This cross experienced some prior consolidation, especially a few days before this particular signal. This trading method can be used to avoid a range-bound market in that the RSI would neither be above the level 60, nor be below the level 40 when there is consolidation. This trade also worked well. We entered the trade at 1.4400, with a stop loss at 1.4310 and a profit target of 1.4580. The target was hit the following trading day for the maximum profit.
In “Breaking even” (below), we can see our risk control at work. The short trade in the AUD/USD initially went our way but then it failed to reach its target. Luckily, it has moved far enough into profitable territory (50 pips) that we had moved our stop to breakeven. Analytically speaking, the price hit a major demand zone and shot higher. Our entry price was 0.9682 on June 1 with an initial stop loss of 0.9772 and a profit target of 0.9502. The stop, which we later moved to breakeven, was hit the same day.
Over time, this trading strategy works. As with all systems, though, it’s imperative to follow the rules and to always trade small so you can stay in the game. If the system doesn’t work for you, either because of your risk tolerance or your time frame, then move on, but don’t modify the system or ignore trades. The trade you skip may be the one that puts you in the black. Above all, however, don’t stop learning. Commit yourself to ongoing education and explore new opportunities with discipline and restraint.
Azeez Mustapha is a professional forex trader, forex signal strategist, fund manager, researcher and coach.